July 8, 2010 - Global pulp markets are facing increasing turmoil. While reports of spot discounting have been appearing for the past two months, the situation in Asia appears to be deteriorating — producers were unable to hold prices flat in July, with August apt to see more dramatic declines. With global dynamics shifting, prices could move significantly over the next 2-3 months, say Deutsche Bank (DB) analysts who cover the forest and paper sector.

According to DB, Latin American pulp producer Arauco has reduced July prices by $50/mton for all pulp grades in Asia.

“Our trade contacts suggest this reduction came just a few weeks after Arauco told investors that they would hold prices flat during July,” said Mark Wilde, a senior analyst at Deutsche Bank. “The cut reportedly includes eucalyptus (hardwood), radiata (softwood) and unbleached softwood grades.”

Arauco operates five pulp mills in Chile and one in Argentina for a combined annual production capacity of about 3.2 million tons per year of hardwood and softwood kraft pulp — about 50% of that production is sold to China.

“Arauco's sales are heavily oriented to the Chinese markets and their price reductions are certain to force counters from other pulp producers,” Wilde said.

Reports also suggest that Chinese paper markets have weakened markedly during the second quarter, with soft volumes and prices off as much as $200/mton.

However, Wilde said that trade reports from other regions of the globe are not as bearish. “Although one North American contact suggested 'It's going down, down, down fast,' there isn't much hard evidence of a collapse," Wilded noted.

Hardwood is reportedly down $30- 50/mton, while softwood is holding up a bit better. The North American hardwood market is reportedly being pressured with the restart of a mill in Thurso, Quebec and Domtar's loss of a major buyer of pulp from the Woodland, Maine mill, Wilde said.

In Europe, brokers report the NBSK market remains tight. However, with global turmoil increasing and European mills headed into summer holidays, it isn't hard to see markets swinging sharply over the next 2-3 months.

“Because many of these developments have yet to be reported in the trade press, we are still trying to carefully and completely assess the full situation,” Wilde concluded.